Understanding the Pitfalls and Potential of Cloud Payroll

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By Dave Foxall

Cloud Payroll Software: A Risk/Reward Analysis

With dozens of IT providers offering solutions “on-demand” or as software-as-a-service (SaaS), accessing payroll automation via the cloud is becoming not only more popular with organizations, but also more viable as an option—a trend that is making a slow but steady push to unseat the traditional on-premise payroll software deployment model. In fact, a recent Gartner report found that, “HCM [human capital management] software as a service (SaaS) continues to grow at two to three times the pace of on-premises solutions". Further, Ernst & Young’s information security survey found that “61% of respondents are currently using, evaluating or planning to use cloud computing-based services within the next 12 months”. Indeed, as has been seen with other business intelligence and HR applications, payroll software delivered via the SaaS deployment model may soon be the preferred mode of automation for companies worldwide—regardless of size or location.

The cloud model itself came about as a response to a number of market trends driving innovation and a move away from traditional “on-premises” solutions; including the new economic conditions that came with the global recession, the breaking down of artificial borders between markets, the changing nature of the modern workforce, and the agility allowed by modern, mobile technology. All these factors (identified in THINKstrategies’s Accelerating the Move to SaaS and Minimizing the Risks: Crossing the Chasm to the Cloud) encouraged the development of a software deployment model that was cheaper and less restrictive. However, for all its popularity and phenomenal growth, cloud payroll systems remain a relatively young solution. As such, any organization looking at leveraging this deployment model for their payroll function should adopt a balanced view of what the true benefits will be. Here, we outline the various pros and cons of cloud payroll and decide whether the potential rewards that come with shifting to a cloud provider outweigh the risks.

Cloud Payroll Software Pro #1: Reduced Cost

The lack of an upfront capital expenditure in the form of a license fee or even supporting hardware, gives the SaaS subscription model one of its most widely-quoted benefits. While on-premises vendors will focus on issues such as security, and outsourcing providers tout their personal service (and resulting staff savings), there is little doubt that cloud payroll can offer cost savings. In fact, reports from Constellation Research highlight that a SaaS subscription does in fact cost less than the initial installation (plus management and re-training) expenditures of a traditional payroll solution. However, SaaS payroll money matters have the potential to extend beyond simple savings and onto the balance sheet. Indeed, in many cases, the cloud payroll cost model allows for a shift in software cost emphasis from the capital to the operational—effectively allowing the payroll IT expenditure to become more even and predictable. Still, differing organizational circumstances can create cost implications that are unique to your company—a fact that could well sway some of these benefits into negative territory.

Cloud Payroll Software Pro #2: Agile Technology

Aside from potential cost savings, organizations that opt for cloud payroll are often those looking for flexibility. Indeed, as the operational context of compliance mandates, employee demands and new technological possibilities evolves on a continuing basis, a flexible payroll solution that can cope with multiple contracts, changing cycles and an array of local, state and federal legislation is a core requirement for business success. With the potential of integrated packages that connect payroll directly to scheduling, leave management, and time and attendance data, SaaS options are beginning to offer the same connectivity benefits of on-premises applications without the system management overheads.

Cloud Payroll Software Pro #3: Rapid Implementation

The choice of any new payroll software system is only the first step on the time to value path, and implementation times are often the most significant factor when it comes to realizing that return-on-investment (ROI). In fact, a recent Deloitte survey found that 47% of organizations cite "quick implementation" as the top benefit of Software-as-a-Service deployment. In essence, the lack of on-premises hardware and/or software to run the application means that cloud-based payroll solutions can be installed faster. Add to that the fact that many cloud payroll solutions have easier and more seamless updates, tend to be offer a better user experience (UX), and can potentially decrease system learning times, and it’s not difficult to understand why this HR software’s implementation benefits are heralded.

Cloud Payroll Software Con #1: Vendor Stability

Competition in the cloud payroll market is stiff and will likely only increase in intensity within the coming months and years. Pure-play SaaS payroll vendors face their own risks and challenges; including creating sustainable revenue and maintaining data integrity and security (along with privacy compliance)—issues which can become significant risks for their client base. As the Ernst & Young security survey states, “Whether we realize it or not, our appetite for external cloud services has increased our dependency on third parties and …as organizations become increasingly locked-in to their cloud provider, they also face compliance risks, contracting and legal risks, and integration risks.” The bottom line is that the SaaS payroll provider has charge of the client’s payroll data and provisions must be made to ensure access in the event of vendor company failure. As with any new service market, not every provider will survive or remain independent. As such, organizations should practice due diligence in this payroll software selection process—gathering any and all facts possible pertaining to company stability, financial strength, data transfers, liquidity plans, transition costs, and operational expenses.

Cloud Payroll Software Con #2: Configuration and Customization

The flip side to the SaaS reputation for agile, highly configurable solutions is that for the vendor, profitability comes from the economies of scale that SaaS deployment offers (e.g. multi-tenancy). Thus, although SaaS offerings are far from off-the-shelf “one size fits all” solutions, there is a limit to the amount of tailoring to client needs that is possible. Knowledge Infusion's Heidi Spirgi sums up the situation by saying, "In SaaS, you are limited to the capabilities the vendor provides". As such, it is crucial that organizations clearly understand the capabilities of any given payroll solution (and the complexity of integrating it with other applications) before any agreement is initiated.

Cloud Payroll Software Con #3: Security and Reliability

SaaS payroll benefits, as Ernst & Young observed, must be balanced with “new challenges when it comes to application security, identity and access management, authentication, encryption and data classification.” Combined with the fundamental SaaS challenge of maintaining 24/7 operability, the twin issues of data protection and access must also be considered by the organization contemplating a cloud payroll strategy. Due diligence in this regard would include some key questions focused on the vendor’s:

Payroll in the Cloud – The Bottom Line

SaaS is certainly a model for payroll service delivery that has moved beyond the first flush of fashionable technological gimmickry—becoming, as stated above, a viable and preferred option that can fit well into an organization’s payroll strategy. Indeed, the cost savings, coupled with the avoidance of on-site overhead, along with a rapid time-to-value makes cloud payroll an attractive and appropriate option for many organizations. Ultimately though, a situation-specific individual needs and cost-benefit analysis should be conducted in order to ensure that not only will the potential rewards be fully leveraged, but also that the risks are fully and objectively understood.

With the potential of integrated packages that connect payroll directly to scheduling, leave management, and time and attendance data, SaaS options are beginning to offer the same connectivity benefits of on-premises applications without the system management overheads.